DCAPM Model Applicability on Emerging Markets: Empirical Research

Abstract

Risk-Return notion appears to be one of the basis concepts in modern corporate finance since it provides methods of investment, capital budgeting and credit risks estimation in capital owners return terms. Moreover the concept allows building up effective investment and financial decision-making subject to the estimate derived. Nevertheless the questions of estimate methods appropriateness as well as constructing of adequate model able to correlate expected risk with the investor required return are still the matter of heated disputes. The present paper is thus aimed at systematization of classical one-factor expected return model CAPM and offers numerous ways of CAPM development by means of new risk interpretations introduction. The paper provides detailed coverage for researches of various CAPM modifications based on emerging markets data (Venezuela, Egypt, Tunisia, South America, and Eastern Europe) and describes the conduction of H.Estrada’s DCAPM testing with the introduction of downside risk measure - downside beta factor. The article also reports the results of empirical research devotes to the DCAPM applicability analysis both for the sample of a number of Russian companies (25 companies, 2003-2006) and for the country risk investigation (15 countries, emerging capital markets, 2002-2007). The analysis proved that the DCAPM preference for company’s return description is not obvious while the model could be regarded as a successful alternative to the classical CAPM for country risks description.